THE GLOBAL CRISIS CAUSES, RESPONSES AND CHALLENGES The global crisis Causes, responses and challenges INTERNATIONAL LABOUR OFFICE • GENEVA Copyright © International Labour Organization 2011 First published 2011 Publications of the International Labour Office enjoy copyright under Protocol 2 of the Universal Copyright Convention. Nevertheless, short excerpts from them may be reproduced without authorization, on condition that the source is indicated. For rights of reproduction or translation, application should be made to ILO Publications (Rights and Permissions), International Labour Office, CH-1211 Geneva 22, Switzerland, or by email: [email protected]. The International Labour Office welcomes such applications. Libraries, institutions and other users registered with reproduction rights organizations may make copies in accordance with the licences issued to them for this purpose. Visit www.ifrro.org to find the reproduction rights organization in your country. The global crisis: Causes, responses and challenges Geneva, International Labour Office, 2011 ISBN: 978-92-2-124579-7 (print) ISBN: 978-92-2-124580-3 (web pdf) economic recession / economic recovery / employment / employment creation / social dialogue / wages / social security / trade / role of ILO / Arab countries / developing countries / Europe / USA 03.04.3 ILO Cataloguing in Publication Data The designations employed in ILO publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. 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Catalogues or lists of new publications are avail- able free of charge from the above address, or by email: [email protected] Visit our website: www.ilo.org/publns Photocomposed in Switzerland JMB Printed in Switzerland SRO PREFACE A key lesson from the global financial and economic crisis is that policies for economic growth which have prevailed over the past three decades need a rethink. For one thing, even before the crisis, economic growth was not creating enough decent work opportunities. The global employment rate did not increase despite high economic growth. The vast majority of jobs were precarious or informal and did not offer adequate opportunities for women and men to realise their legitimate aspirations. In many countries, young women and men experience great difficulties in securing a job, and when they do, it is often low skilled. Access to social protection has improved only slowly, even in countries with high economic growth. And the application of fundamental principles and rights at work has remained uneven. These trends have led to a significant widening of income inequali- ties, unprecedented in recent economic history. They also went hand- in-hand with significant environment degradation. In short, economic growth has not enabled the majority of people to move on in life. Another lesson from the crisis is that growth was unsustainable from the point of view of the economy itself. The crisis erupted in the finan- cial system. It revealed that growth relied on weak foundations: too much recourse to debt in some countries, excessive reliance on exports in others. Interestingly, in order to tackle the crisis, policy makers moved away from the conventional approach as documented in this volume. Jobs were protected in sustainable enterprises, social policy was used to boost domestic demand, and an effort was made to avoid cuts in wages and rights. Rather than applying one-size-fits-all policies, many countries – especially emerging and developing ones – acquired self-assurance and tailored crisis responses to their specific needs. This policy approach, consistent with the ILO Global Jobs Pact, was instrumental in stimu- lating the economy and reducing job losses. Many challenges lie ahead, however. There is a risk of a return to business- as-usual. The financial system remains largely unreformed. Unemployment and job precariousness decline slowly, especially among youth, even though the economy is growing again. A growth-cum-inequalities path is in motion v The global crisis: Causes, responses and challenges once again, with unpredictable social and political consequences. And new risks have emerged, notably as a result of the sovereign debt crisis in some European countries. This volume, which assembles ILO staff research carried out since the start of the global crisis, provides key insights into policies that have worked and the challenges ahead. My thanks to Raymond Torres, Director of the International Institute for Labour Studies, for coordi- nating this ILO research and to Uma Rani for the help in putting the papers together; and thanks to ILO staff who contributed to this. The volume assembles valuable ILO research further consolidating the knowledge base required for the forging of policies based on ILO values. Let us build a new era of social justice with decent work. Juan Somavia ILO Director-General vi CONTENTS Preface .................................................. v List of abbreviations ...................................... xvii Acknowledgements........................................ xxi Introduction ............................................ 1 Part I Crisis responses: International and regional perspectives . 7 1 Responding to the global crisis: Achievements and pending issues ................................... 9 Raymond Torres 1.1 Introduction..................................... 9 1.2 Economically inefficient income inequalities.......... 10 1.3 Responding to the crisis without properly addressing its root causes: Benefits, limitations and costs ......... 13 1.4 Key policy priorities .............................. 17 1.5 Conclusions ..................................... 19 2 Explaining Latin America’s robust recovery from the crisis 21 Andrés E. Marinakis 2.1 Introduction .................................... 21 2.2 Pre-crisis macro-foundations ...................... 22 2.3 Factors external to the region ...................... 23 2.4 Role of labour market policies ..................... 25 2.5 What do we understand by countercyclical policy? .... 29 2.6 Rediscovering the domestic market ................. 31 2.7 Conclusions .................................... 32 vii The global crisis: Causes, responses and challenges 3 Recovery, job quality and policy priorities in developing Asia . 35 Gyorgy Sziraczki, Kee Beom Kim, Nikhilesh Bhattacharyya, Sukti Dasgupta and Valerie Schmitt-Diabate 3.1 Introduction.................................... 35 3.2 Recent developments ............................. 36 3.3 Labour market recovery .......................... 37 3.4 Policy priorities for the recovery and beyond......... 41 3.5 Conclusions .................................... 49 4 The labour market in the Arab States: Recent trends, policy responses and future challenges .................. 51 Zafiris Tzannatos, Tariq Haq and Dorothea Schmidt 4.1 Introduction..................................... 51 4.2 Labour market trends ............................. 52 4.3 Crisis transmission channels ....................... 55 4.4 Selected policy responses .......................... 57 4.5 Key challenges ................................... 59 4.6 Conclusions ..................................... 64 Part II Political economy of crisis responses ............... 67 5 Post-crisis macroeconomics and least developed countries: A way forward....................................... 69 Iyanatul Islam and Sarah Anwar 5.1 Introduction..................................... 69 5.2 The standard macroeconomic framework and its contested role in the LDC growth revival of the 2000s . 70 5.3 Aligning macroeconomic policies with the twin goals of job creation and poverty reduction in LDCs: Some suggestions................................. 72 5.4 Conclusions ..................................... 80 6 The politics of economic adjustment in Europe: State unilateralism or social dialogue? .................. 81 Youcef Ghellab and Kostantinos Papadakis 6.1 Introduction..................................... 81 6.2 Social dialogue: A key component of crisis recovery strategy in 2008–2009 ............................. 82 viii Contents 6.3 Fiscal consolidation measures adopted since 2010 and the dangers of financial-market-driven decision-making.................................. 82 6.4 Austerity measures adopted since 2010 and their social impact .......................................... 84 6.5 Conclusions ..................................... 90 7 Labour reforms in Romania........................... 93 Robert Kyloh 7.1 Introduction..................................... 93 7.2 Labour reforms as a response to the 2008 crisis.......